FIN 3080 UNIT 8 EXAM QUESTIONS
WITH 100% CORRECT ANSWERS
What triggered the 2008 crisis? - Answer- Housing market collapse
Why did housing prices rise before the crisis? - Answer- Government policy; relaxed
lending; belief prices would keep rising
What happens when housing prices fall? - Answer- Loss of equity; defaults increase;
prices fall further
Why are low-equity loans risky? - Answer- Small price drops create negative equity and
default incentives
What were key vulnerabilities in the financial crisis? - Answer- Poor incentives;
excessive leverage; political pressure; weak regulation
What is "originate-to-distribute"? - Answer- Banks make loans and sell them instead of
holding them
What is excessive leverage? - Answer- Too much borrowing relative to equity
Why was regulation a problem in 2008? - Answer- Fragmented oversight; gaps in
regulation (e.g., AIG, CDS)
What was a key lesson from Lehman Brothers collapse? - Answer- Unexpected
spillovers across economy
What happened after Lehman Brothers collapsed? - Answer- Commercial paper failed;
MMMFs broke the buck; credit markets froze
What does "breaking the buck" mean? - Answer- MMMF NAV falls below $1
What is commercial paper? - Answer- Short-term debt issued by large firms
Why did GE struggle during the crisis? - Answer- Could not access short-term funding
due to credit crunch
What was TARP? - Answer- Government bailout program for financial institutions
WITH 100% CORRECT ANSWERS
What triggered the 2008 crisis? - Answer- Housing market collapse
Why did housing prices rise before the crisis? - Answer- Government policy; relaxed
lending; belief prices would keep rising
What happens when housing prices fall? - Answer- Loss of equity; defaults increase;
prices fall further
Why are low-equity loans risky? - Answer- Small price drops create negative equity and
default incentives
What were key vulnerabilities in the financial crisis? - Answer- Poor incentives;
excessive leverage; political pressure; weak regulation
What is "originate-to-distribute"? - Answer- Banks make loans and sell them instead of
holding them
What is excessive leverage? - Answer- Too much borrowing relative to equity
Why was regulation a problem in 2008? - Answer- Fragmented oversight; gaps in
regulation (e.g., AIG, CDS)
What was a key lesson from Lehman Brothers collapse? - Answer- Unexpected
spillovers across economy
What happened after Lehman Brothers collapsed? - Answer- Commercial paper failed;
MMMFs broke the buck; credit markets froze
What does "breaking the buck" mean? - Answer- MMMF NAV falls below $1
What is commercial paper? - Answer- Short-term debt issued by large firms
Why did GE struggle during the crisis? - Answer- Could not access short-term funding
due to credit crunch
What was TARP? - Answer- Government bailout program for financial institutions
